As an investor I am a contrarian at heart. This means I buy shares when they are cheap and unloved. When the crowd is selling, I am buying. When the crowd is buying, then I am thinking of selling.
In the summer of 2012 Europe was still in the throes of the Eurozone crisis, and stock markets were tumbling. The VIX index — the measure of stock market volatility and a gauge of investors’ fear — was rocketing. Investors were panic selling. So of course this was the time to buy!
One of my first contrarian plays
At the time Barclays’ share price stood at 150p. With hindsight this was an astonishing bargain. All the banks had fallen as fears about their collapse meant that investors were panic selling their bank shares.
Now I would love to say I had bet the house on Barclays shares, and subsequently made a mint. In fact I was rather tentative, and only made a small investment in the bank. I still own these shares today, and have subsequently added to my holding, though unfortunately not at such a keen price. Even contrarians wish they were more contrarian.
A reality check
But this year has been a reality check. Bank share prices have fallen or been treading water. Barclays retail business has been surging ahead, buoyed by a recovering economy and booming house prices. Interestingly it is the investment bank, which was so strong when the retail business was weak, which has faltered.
Is this the demise of investment banking? Of course not. This is no secular decline, but rather a cyclical fall in profits. The fact is that investment banking has actually been progressing quite well in recent years, because of the fixed income boom. But now yields are finally falling, and so are investment bank profits.
Eventually I expect the stock market to surge ahead, and when we have a shares boom the investment bank will again increase its profits.
In fact I see the whole of Barclays as being in transition, adjusting to a world of low interest and mortgage rates, and a world where people bank via computers and smart phones. Personally, I can’t remember the last time I wrote a cheque, and these days I very rarely carry any cash. The future of banking will be quite different from its past.
But with interest rates set to increase next year, a housing market which is rapidly strengthening, and a booming economy, Barclays’ profits will steadily rise. The 2014 P/E ratio is 10.6, falling to 8.1 in 2015. This is cheap. Barclays was one of my picks of the year: I expect it to push on from here.
